Mr. Azfar Saeed Baig is an accomplished professional in the energy industry. He has spent nearly 25 years of his dynamic career leading teams in industries as diverse as FMCG and power, and at the State Bank of Pakistan. He is currently heading a Division at Byco Petroleum Pakistan Limited, which looks after Communications, Information Technology, Environment Health and Safety, Security, Human Resource, and Office Supervision, as its Vice President.
Following are the edited transcripts of the conversation BR Research recently had with Mr. Azfar Saeed Baig about the company's 25-year journey and its future plans:
BR Research: What is Byco's total refining capacity? How do you identify the level of Byco's capacity utilization?
Azfar Saeed Baig: Byco's name plate capacity is 156,000 bpd. As a private sector entity it operates under the principle of profit maximization. Therefore, we are constantly adjusting our throughput to levels which can bring us positive gross refining margins (GRM's).
BRR: What challenges do you foresee in the short and long term?
ASB: In this rapidly evolving socio-economic environment, commercial entities like any other organization need to change their organizational structures, strategies and above all their way of thinking business in order to keep up with this fast pace of change. Byco is no exception. Byco in the last 5 years has transformed considerably and will continue to do so. From technical, commercial and financial challenges to the challenges of operating in a highly regulated oil industry; from suddenly changing crude oil prices to sudden hikes in the PKR-USD parity; from the conflict-ridden Middle Eastern region to unstable borders at home, and from sharp falls in the demand of furnace oil, to constantly evolving fuel standards, the oil refining industry in particular is facing its most daunting challenges ever.
However, one of the key strategies to enable our industry to surmount such challenges is to develop our human resources. Only a visionary and result-oriented leadership, together with highly professional teams can take the refining industry to new heights.
BRR: What outlook do you expect for the refining industry in the medium to long term?
ASB: Although planners forecast a 10 percent year-on-year growth in demand for the next 5 years, currently due to the rapidly evolving fuel mix of the country there has been a precipitous fall in the demand for furnace oil. Therefore, the industry is now seeing negative GRM's. This is why the entire industry is in a catastrophic situation, and it is feared that one or two players may go out of business.
BRR: How did the industry come to this point? Was it not foreseen?
ASB: When you don't allow free competition, it leads to complacency. This is true for other industries as well. I think the refining industry is overly regulated. Guaranteed rates of return have stifled innovation. Market forces have been muted due to the extreme levels of regulation in Pakistan's oil industry.
The IFEM (Inland Freight Equalization Margin) is a case in point, which is stifling price competition. Unless we deregulate the industry we cannot expect positive outcomes. And because it is such a critical industry this will have negative spillover on the country's economy as a whole.
BRR: What is Byco's crude oil source; What's the ratio of local to imports?
ASB: We have been importing light sweet crude from the Middle East primarily. But lately we have been trying to procure a larger portion of local condensate as well. 90:10 would be the ratio, in favor of imports.
BRR: What is Byco's share in the overall refining of crude oil in the country?
ASB: Our nameplate capacity currently is 156,000 barrels per day. Out of Pakistan's total refining capacity of 420,000, that gives us a share of 37 percent of the installed capacity of the country. It is obviously in Pakistan's best interest to maximize refining in Pakistan as it saves us precious foreign exchange and we do it much more efficiently due to the lower labour cost advantage that we have over the Middle East where labour costs are significantly higher than Pakistan.
BRR: How has Byco been dealing with the phasing out of High Sulfur Furnace Oil (HSFO) demand and the resulting stockpiles?
ASB: Like every other refiner, we are also considering to upgrade our facilities so that we eventually stop the production of HSFO. This will take years to implement though, and billions of dollars of additional investment, which is a very tough ask in an environment of negative refining margins. In the meantime, we have also succeeded in an innovative solution which is to export our surplus furnace oil.
BRR: How has Byco addressed the major challenges that it has faced?
ASB: Byco Petroleum Pakistan Limited is celebrating its silver jubilee, having been founded a quarter century ago in January 1995. True to our motto, “Be the change", we at Byco see every challenge as an opportunity to innovate. We installed the first Single Point Mooring (SPM), a deep sea floating liquid terminal, when we were denied establishing a terminal at Keamari, and the other alternatives were too costly. Byco installed the largest Isomerization unit and Catalytic Reformer in Pakistan, enabling us to be exceptional as the only firm upgrading all of our naphtha to gasoline. We are the first ones to export HSFO this past week, which made international news, while the entire refining industry has been grappling with ever growing stockpiles of furnace oil due to the sudden drop in its demand.
It was only in 2004 when Byco launched its first refinery with a capacity of only 18,000 barrels per day. Today, Byco's 2 refineries have a design capacity of 156,000 barrels per day, representing 37 percent of the installed capacity of Pakistan's petroleum refining sector, making us Pakistan's largest oil refining company.
In 2007, we ventured into the petroleum marketing segment by setting up our first retail stations at Sukkur and Rawalpindi. Today, we have 389 retail outlets across the country with about half of Byco's refined products sold through our own marketing channel
BRR: How has setting up an Isomerization plant affected Byco's volumes?
ASB: We have increased our gasoline production manifold as a result of the installation of the Isomerization Unit. We have the largest Isomerization unit in Pakistan, which has increased our PMG volumes by five times.
BRR: The petroleum consumption is on a down cycle. How do you foresee petroleum sales in 2020 and beyond?
ASB: The decline in demand for furnace oil as fuel for the power industry is here to stay. Hence refineries must adjust their business model accordingly to curtail furnace oil production. This will not be easy; new fuel oil cracking facilities will have to be constructed, requiring enormous new capital and several years of hardship till they are operational.
The OCAC in a report to the Prime Minister predicted 10percent growth in petroleum demand for the 5 years starting in January 2018. Obviously some areas have been temporarily affected due to the devaluation of the rupee and a general economic slowdown. But gasoline demand has not dropped off despite these obstacles. We are bullish on our industry in the medium to long term.
BRR: The government has asked the refineries to upgrade and show significant improvement in 3 months. How do you respond to that?
ASB: Just as we have been successful in exporting FO, we intend to meet all our challenges as an opportunity for improvement. We have short term, medium term, and long term solutions to these challenges.
BRR: Do you agree to the conversion of hydro skimming refineries to deep conversion as the only way to turn around refining segment's fortunes?
ASB: There is no question that technology needs to be updated to meet the challenges of tomorrow. Whether it is deep conversion, fluid catalytic cracking, hydro cracking or delayed coking or even changing the crude slate, the solution will depend on each refineries particular situation that they find themselves in.
BRR: What are Byco's plans for the next three years?
ASB: In comparison to the other refineries, Byco has the size and scale to take on these costly and complicated challenges economically and have the in-house expertise, experience and skill to deliver.
BRR: How will you attract and retain the requisite talent to keep your firm nimble in this very dynamic industry?
ASB: Byco is committed to an enabling culture where employees feel like part of a family when they work here. We have a very friendly and warm environment where our employees are supportive towards each other. With more and more millennials and now Generation Z joining the workforce, companies will have to adapt themselves and offer an experience that is at once stimulating, challenging and rewarding. This in my view is the way futuristic companies must take on the very serious challenge of talent management that we have already begun to face.